Learn to Trade Blog

Trading Tips, Insights & News

How Should Traders Prepare for the Brexit Possibility?

Forex traders around the world are bracing for June 23 – the day when UK voters will decide whether to stay in the European Union (EU). For Forex traders and brokers, the uncertainty of a possible “Brexit” – or Britain’s exit – is creating dramatic volatility across the Forex marketplace. In the last month, pound pairs like GBP/USD and GBP/AUD have undergone volatile spikes following polls that have showed a close race among voters.

This volatility is expected to continue leading up to and after June 23. In fact, analysts at the Bank of Tokyo Mitsubishi suggested the pound would move significantly following the vote. If UK voters elect to stay, the analysts estimate a six per cent rebound for the pound against the euro and other currencies. Conversely, analysts predict a “no vote” could cause a six per cent drop in value.

With this level of uncertainty in the markets, what should Forex traders do to prepare? With a bit of preparation, many traders can minimise their risk exposure leading up to and following the vote on June 23. Here are a few tips for trading during the Brexit:

Know your margin requirements

Forex brokers should be taking steps to limit their risk exposure to Brexit volatility. As such, many brokers are increasing margin levels for pound and euro pairs, as well as lowering available leverage for these pairs. These changes will take effect leading up to the vote and may remain in place until the uncertainty clears. Traders should be prepared for these changes to avoid margin calls.

Watch for market announcements

Both the Bank of Tokyo and the U.S. Federal Reserve Bank have scheduled meetings in the week before the Brexit vote. If either groups take action during their June 14-15 meetings, the markets could experience even greater volatility. Although it’s unlikely the Federal Reserve will increase interest rates, following the dismal U.S. jobs report earlier this month, the possibility remains. Traders should pay close attention to any policy statements to avoid unexpected market swings.

Prepping for a stay vote

If UK voters opt to stay in the EU, many analysts have suggested the pound will strengthen. Goldman Sachs, for example, advised that following a “stay” vote, the pound could make solid gains against the euro and other GBP pairs. Some have even predicted a gain of 10 per cent against a number of major currencies. Traders who short the pound should use proper risk management to avoid losses in the event of a stay vote.

What a “leave” vote means

A “leave” vote could have an immediate impact on the GBP’s value and pound pairs. The UK Treasury recently stated that a vote to leave the EU could cause a year-long recession and a quick economic shock. The UK even suggested a decline in growth of as much as three to six per cent should voters decide to leave. In any case, the uncertainty with GBP pairs will continue following the vote.